Will the bear bite us again?

Commentary: How ETFs can help you survive in another bear market

By

JohnNyaradi

BEND, Ore. (MarketWatch) — With recent grim economic news and significant technical damage inflicted upon major indexes, everyday investors and professional traders alike are wondering if recent events are a simple correction or the harbinger of a new bear market.

Looking at the world on a fundamental basis, one cannot help but wonder if the stock market can find the power to sustain another leg higher. Negative factors include:

The imminent end of quantitative easing and its impact on risk assets.

A cascading, unrelenting stream of economic reports that indicate a significant economic slowdown developing in the U.S. along with persistent high unemployment.

Strenuous efforts by Chinese authorities to combat inflation and slow the growth in China, which will likely act as a drag on global demand.

Ongoing problems with the aftershock of the earthquake and tsunami in Japan and its negative effects on that country’s economy and global demand from the world’s third-largest economy.

The escalating showdown between Germany and the European Central Bank over how to resolve the Grecian debt problems that just won’t seem to go away.

The recent outflow of money from equity funds and into money markets.

The ever louder ticking of the countdown clock to the August 2nd deadline for raising the debt ceiling and the possibility of a U.S. default.

The technical indicators look just as glum as demonstrated in the S&P 500 chart below.

Here we see that the index has fallen sharply in recent days as the market has come to realize that “QE3” will not be forthcoming in the near future.

The index has knifed through multiple levels of significant support, including the 50-day moving average, and now rests perilously close to the widely watched 200-day moving average and the recent March lows.

The 200-day moving average is widely viewed as the demarcation line between bull and bear markets, and a sustained break below this level would indicate the likelihood of even lower prices ahead, as more and more money would likely flee the equities markets.

So we could be coming to quite a noteworthy turning point in the future of the U.S. and global stock markets, and the obvious question is: “How can investors use exchange-traded funds to protect themselves and prosper if the bear attacks again?”

Several possibilities well known to professional money managers and institutional traders are now also available to retail investors through the flexibility and versatility of ETFs:

1. The U.S. dollar tends to do well when the “flight to quality” trade is on, for in spite of all of our problems, we’re still seen as the “least ugly of the ugly” and a bastion of safety in a dangerous and uncertain world. The PowerShares Bullish Dollar ETF
UUP, +0.38%
is a good choice for exposure to this market.

2. Similar to the dollar, U.S. Treasurys are seen as a safe haven in times of stress, and so, not surprisingly, the U.S. Treasury market has been on a rally, with 10-year bond yields now at a six-month low. The iShares 10-20 Year Treasury ETF
TLH, -0.62%
has been a top performer as of late and could continue that trend if the bear rears its ugly head.

3. Inverse ETFs, exchange-traded funds that move opposite to their underlying index, can offer a hedge for positions you don’t want to sell and can also offer outright “short” exposure to the markets, even within IRAs and qualified retirement plans. (These can produce some tricky tracking errors since they’re designed to track the daily prices of the underlying index, and so it’s important to read the prospectus carefully and fully understand these products before putting your money to work here.) Many inverse ETFs are available for all major U.S. indexes, as well as for major sectors and even for international markets and individual countries.

We’re going to find out very soon if this is a just a correction or the start of something worse. However, if the bear does go on the hunt again, your portfolio doesn’t have to be mauled, and you don’t have to scurry to the safety of a money market or stick your money under a mattress. With today’s innovative ETFs, you have the opportunity to turn a bear market into a bull and seek profits in sectors and ETFs that can prosper during bear market declines.

John Nyaradi publishes Wall Street Sector Selector, a financial media site specializing in exchange-traded funds. He is also the author of Super Sectors: How To Outsmart the Market Using Sector Rotation and ETFs. (wallstreetsectorselector.com)

John
Nyaradi

John Nyaradi publishes Wall Street Sector Selector (www.wallstreetsectorselector.com), which provides news, analysis and strategies for trading exchange-traded funds. He's also the author of "Super Sectors: How To Outsmart the Market Using Sector Rotation and ETFs."

John
Nyaradi

John Nyaradi publishes Wall Street Sector Selector (www.wallstreetsectorselector.com), which provides news, analysis and strategies for trading exchange-traded funds. He's also the author of "Super Sectors: How To Outsmart the Market Using Sector Rotation and ETFs."

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